AMD hurt by weaker prices, shipments

Weighs major restructuring to cut future capital spending

MattAndrejczak

SAN FRANCISCO (MarketWatch) -- Advanced Micro Devices Inc., stung by weaker prices for its PC and server chips, swung to a first-quarter net loss amid softer microprocessor sales and a big operating loss in its key business unit.

AMD
AMD, -0.35%
, locked in a fierce turf battle with larger rival Intel Corp.
INTC, -0.66%
also said late Thursday that it's weighing a major restructuring aimed at reducing future spending costs. The chipmaker may be cash-strapped later this year unless it raises money, slashes spending further or reverses its losses.

Shares of AMD fell 12 cents to $14.16 in trading Friday.

"Intel's strategy to squeeze AMD and win back share appears to be bearing fruit," wrote CIBC World Markets analyst Rick Shafer, who reiterated his sector performer rating on Sunnyvale, Calif.-based AMD.

In the first quarter, AMD reported a net loss of $611 million, or $1.11 a share, compared with a net profit of $184.5 million, or 38 cents a share, generated in the year-ago period. This quarter's results include acquisition and stock-option charges of 26 cents.

For the three months ended March 31, sales fell to $1.23 billion from $1.33 billion, in line with AMD's reduced forecast earlier this month.

Analysts polled by Thomson Financial had, on average, been looking for sales of $1.2 billion and a loss of 48 cents a share.

AMD's been harder hit by weaker microprocessor prices than Intel. AMD has cut prices three times this year on certain chips in a bid to stoke demand.

By contrast, Intel has been boosted by new sets of chips that have made it less aggressive on price.

Pinch on margins

AMD also reported gross margin, a key profitability metric for chip firms, of 28.1%, down from 58.5% in the year-ago quarter.

The company was hurt by "significantly" lower unit shipments of its microprocessors, lower average selling prices, and lower-margin products it inherited from ATI Technologies, the graphics chipmaker acquired last October.

Underscoring AMD's woes, the company's computing solutions unit -- its main income generator -- reported an operating loss of $321 million. By comparison, the unit tallied operating income of $312 million a year earlier. Revenue in the business unit fell 31%.

AMD said unit shipments of its server and desktop processors declined sharply from the year-earlier quarter, while laptop shipments -- and revenue from those shipments -- increased significantly.

For the second quarter, AMD said revenue will be flat or slightly up on a sequential basis. By comparison, Intel said its revenue would be lower than the $8.9 billion generated in the first quarter. See full story.

'Intel's strategy to squeeze AMD and win back share appears to be bearing fruit.'
Rick Shafer, CIBC World Markets

While company executives declined to offer specific details about its restructuring such as whether it would involve layoffs or major cost cuts, Chief Executive Hector Ruiz hinted the restructuring could involve an "asset-light" strategy, suggesting AMD may outsource more of its chip production, an approach Texas Instruments Inc.
TXN, -1.92%
pursued several years ago.

Such a move, if pursued, would curtail future factory investments, an acknowledgement that AMD cannot keep pace with Intel in the spending race. AMD last year started to outsource a portion of its chip production with foundry operator Chartered Semiconductor Manufacturing
CHRT, +0.00%

The semiconductor industry's very capital-intensive. Intel, for example, has plowed more than $40 billion into its factories this decade.

Private equity in AMD's future?

By contrast, younger chip suppliers, such as Broadcom Corp.
BRCM
and Marvell Technology Group
MRVL, -1.55%
operate no factories so as to pour more money into research and design.

"I expect this transformation to be bigger and more dramatic in impact that the one we undertook in 2002," said Ruiz, who helped lift AMD's fortunes when he took the helm five years ago. AMD has steadily captured market share from Intel since 2004.

AMD said it has formed an executive task force, with more details to be announced at the company's analyst day this summer.

AMD is facing a possible cash crunch later this year. This month, the chipmaker slashed its 2007 spending by $500 million to conserve cash, and it may be forced to cut spending further unless it raises $1 billion via a debt or stock offering.

The company ended the quarter with $1.2 billion in cash, down from $1.5 billion at the end of 2006. Cash levels are about $600 million above acceptable levels, Chief Financial Officer Bob Rivet said.

AMD's liquidity position has sparked speculation that private-equity firms may take a stake in the chipmaker. In a conference call with analysts, CEO Ruiz didn't rule out the possibility the company would go private if the opportunity presented itself.

"It's like everything else, you know, if it's something that we think makes sense for our shareholders, we will certainly consider and look at it," he said.

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